Sten NilssonInternational Institute for Applied Systems Analysis (IIASA)

A-2361 Laxenburg, Austria

TRANSFORMATION OF THE

FOREST SECTOR

Global Issues in Governance of Natural Resources

April 12-16 2010, Grey Towers, Pennsylvania

Courtesy: Carl Folke

Courtesy: Carl Folke

Some Key Driving Forces of the Future

Degree of Uncertainty

De

gre

e o

f Im

po

rta

nc

e

Demographics

Urbanization

FiberResources

Food Supply/Prices

CustomerPreferences

Globalization

Land-useConflicts

Geo-politicalDistribution

Technology Innovation

FinanceSystem

Corruption

EnergySupply/Prices

GlobalEconomy

Water

Biochemicals

ClimateChange

GlobalCurrencies

Population Development

Source: United Nations Population Division; The 2008 Revision

Source: Bussolo et al., The World Bank, 2008

Composition of the global middle class in

2000 and 2030 (%)

2000 2030

Population Income Population Income

Poor (per capita

income below

average of

Brazil)

81.5 28.7 61.4 15.8

Middle class(per capita

income between

Brazil and Italy)

7.9 14.1 16.4 14.3

Rich (per capita

income at or

above average

of Italy)

10.6 57.2 22.2 69.9

Source: http://www.wwf.be/_media/05-mathis-wackernagel_389259.pdf

Source: http://www.wwf.be/_media/05-mathis-wackernagel_389259.pdf

ECOLOGICAL FOOTPRINT AND INCOME

Global Oil Consumption(conventional and unconventional reserves and resources)

Source: Riahi and Keppo (2006)

Total Energy Demand

Source: IIASA/GGI Database (2007)

3-time increase by 2050

Recent Climate Change (1976–2006)

Source: National Geographic (2007)

Towards a Sustainable Energy Future

Targets for 2050:

Reduce GHG emissions by 50–85% of current

levels

Increase the share of carbon-free energy from

20% to 50–80%

Double the overall energy efficiency from

10 to 20%

Increase the price of carbon from 0 to

$200–300/ton CO2

Increase the annual investments for public and

private energy to $1 trillion

Source: Nakicenovic, 2009

Food Demand

2000 2030 2050

Total Calorie Intake (FAO, 2006)

100% 145% 165%

Cereal Demand (IIASA, WFS, 2007)

100% 142% 167%

Water Conflicts

Total world water demands are predicted to increase by

over 30% by 2030 (IFRPI)

Where Will the Land Come From in 2030?

How Can We Balance the Demand?

Availability

250―300 million ha

Chemical

Industry ?

Agriculture Demand

200 million ha

Industrial Forestry

25 million ha

Bioenergy

290 million ha

Source: Nilsson, 2007

Technologies

1 billion internet users today

4–5 billion internet users tomorrow

through mobile phones

This will lead to completely changed

lifestyles

Our existence is decided by the number

of hits on Google

Geo-politics

US has lost two wars and will not

likely become involved in another

Asian countries on world-wide land

and commodity grabbing (third wave

out-sourcing)

Arab states investing in western

industries

High risk that Europe will lose vital

positions, both economically and

politically

Beijing and Its Bubble ― 1

Economic measure during recessions in the

Western world are used all year round to keep

social stability and national unity in China

China is force-feeding subsidized credits into the

system ― $1 trillion so far in 2009 ― with a under-

developed tax system and interest rates below

inflation. Much speculation investments

Profits of China’s large state-owned companies are

entirely a product of subsidized financing by state

banks (Hong Kong Monetary Authority, 2009)

The Chinese economy is a mixture of family,

social, banking and political ties concerned about

cash flows and not profit

The world will not be the same after, as before, the

current economic crisis

All of earlier financial crises have changed society with

respect to innovations, institutions, and attitudes/values

(Grattin, 2008)

Financial/banking sector will be smaller and less

profitable

Increased taxes; less economic growth

Destruction of markets

Less improvement of living standards

Different economic sectors will find themselves too large

and must restructure

Protectionism will increase

The state will play a more important role than before

The US$ will lose its role as the world’s leading currency

Global Economy ― 1

Industrial Response

70% of major industrial companies’

executives claim global trends have been

important, and are becoming even more so

But very few have successfully addressed

the trends

Reasons for not acting: other priorities,

lack of skills, lack of resources, cannot

decide

Source: McKinsey, 2008

Resilience Challenge

Turning crises into

opportunities for

sustainability

requires social-

ecological resilience

Lack of resilience

may lead to traps

and deepened

vulnerability

Features of Resilience

Persistence: the existence of tipping points will

cause shocks and regime shifts which will

require persistence to withstand them

Adaptability: the capacity of social/economical/

ecological systems to deal with these changes,

uncertainties, transformations and surprises

Transformability: the capacity of social/

economical/ecological systems to create new

systems and new opportunities when the

conditions make the existing system untenable

The forest sector lacks a resilience concept

The Interconnections are the Rubber

Hitting the Road

Peak of fossil fuels

Peak of copper

Peak of water

Peak of productive land

Peak of biomass

Globalization

GlobalEconomy Demographics

Climate Change

Energy

Water

Land Use Conflicts

Two Crises in One in the Forest Sector

The current economic crisis

The structural crisis

Some 70% of US GDP is consumer spending

The average household debt is 130% of disposable income

The USA has shed jobs during 20 consecutive months; it

will take 5–6 years to recover a solid labor market

29% of all home owners want to put their houses on the

market (Zillow, 11 August 2009)

25–45% of all house owners owe more on mortgage than

the house is worth (Deutsche Bank, 2009)

The off-balance sheet obligations associated with social

security and Medicare cause a $56 trillion financial hole

corresponding to $483 thousand per household which is

ten times higher than average household income (GAO,

September 2009)

The cumulative debt is $11.7 trillion in a $14 trillion

economy

When (USA) Bulls Chase Their Tails

The Alphabet

“ L“ “V” “U” “W”

Long

recession

and no

stimuli

Unleashed

pent-up

demand

with

vigorous

recovery

Slow and

flat

recovery

before

rapid return

Growth

returns for

some

period

before dipping

again

Structural CrisisRegional ROCE %

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

USA 4.0 6.8 7.4 4.2 4.5 4.3 6.3 5.7 5.2 5.2 2.9

CANADA 2.4 5.9 7.8 3.1 3.0 4.0 4.6 4.5 2.4 -1.3 -5.9

SWEDEN 6.5 4.7 14.4 8.0 6.8 6.2 5.3 3.0 6.8 8.7 2.7

FINLAND 6.5 9.0 8.8 6.5 4.5 2.5 4.9 2.0 4.2 2.4 0.8

UK 7.0 7.3 7.0 8.6 3.9 7.6 5.2 4.7 6.7 4.6 6.0

EUROPE (REST) 6.5 6.7 9.1 6.7 5.4 3.9 4.7 3.5 4.6 5.0 2.9

JAPAN 1.8 0.5 2.4 3.2 1.6 1.9 3.0 3.6 3.6 2.5 2.1

OCEANIA 3.3 3.4 5.0 4.5 2.9 7.0 5.4 5.5 4.9 5.0 3.0

INDIA 6.6 7.8 8.4 11.5 7.3 8.3 8.7 9.6 10.7 9.7 8.6

OTHER ASIA 5.0 8.2 5.7 4.1 6.9 7.1 7.5 7.0 8.0 8.0 6.6

SOUTH AMERICA 3.4 6.2 12.0 6.6 7.2 8.3 9.7 8.7 9.3 9.0 3.0

SOUTH AFRICA 6.2 4.6 10.5 9.1 7.6 6.3 4.2 1.5 5.5 5.8 4.6

Courtesy: CIBC, Canada

Financial PerformanceReturns on Book Value of Total Capital ― Covers

Debt but Remains Below Cost of Capital

Source: McNutt, CPBIS (2008)

Destruction of Markets

Electronic communication is having a meaningful impact on the

consumption of paper

At the global level, the “intensity of consumption” in the economy has

been declining for newsprint since 1970, and started to decline for

printing and writing papers in 2000

Packaging is more associated with overall economic activity, and is

“holding its own”

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Containerboard New sprint P&W

.

Global Consumption Per Unit of Real GDP

Source: Roberts, CIBC (2007)

Dead Wood and Overcapacity

Printing/Writing Machines in Europe

Cap

acit

y, t

on

/year

“Death Row”

Source: Sundin (2008)

Jack-Knifing

Be competitive by cutting costs

The business concept seems, to a

large extent, to have been cost-cutting

Good for the stock market, but bad for

the companies

Cost cutting alone will not generate

any long-term growth

Futures Study ― Sweden

Market adaptation

Increased innovation

Alternative use of fibers and byproducts

Utilized environmental advantages

Increased productivity

Cost cutting

Competence development

Acquisition/mergers

Source: Opticom International Research AB, 16 September 2009 http://www.papernet.se/iuware_files/user/papernet.se/pdf/framtidsstudie.pdf

Crucial Priorities

Lack of Visions in the Forestry Industry

Rantala (2008): Finnish industry has lacked clear

visions for years

Nilsson (1996): Corporate Amnesia? Swedish

Paper Magazine 9:8

Nilsson (1996): The Forest Sector Lacks Visions,

The Forest, No. 8

With lack of visions and strategies in the

companies, you end up with jack-knifing

Clear visions and strategies dealing with

important long-term issues are a must to

maneuver through crises. Compare President

Obama

Today is Similar to Yesterday

Unsatisfactory financial performance

Over-supply and over-capacity

Low rate demand growth prospects

Financing problems

Fluctuating exchange rates cause risks

To survive be cost-competitive

(Source: Jaakko Pöyry, 1986)

What would have happened if Dr. Pöyry

had stated that to survive you have to

come up with a new business concept?

36

But More is Needed

Ecosystem Services

Ecotourism

Bioenergy

Biofuels

Biorefineries

Biotech and Biochemicals ― 1 Glesinger (1949) outlined in “Coming Age of Wood” that

the biochemicals and biorefineries are the big challenges for the future of the forest sector

Goldstein (1978) demonstrated at the 1978 World

Forestry Congress in “Chemicals from Wood” that wood

has the potential to meet all our chemical needs in place

of petro-chemicals

The Conventional Forest Industry

will not be So in the Future

Without a pro-active understanding of the global

transformations and their resilience there will not be much left

of a conventional forest-based industry

Under all conditions, the conventional sector will be slimmed

down

Much more is needed to have a viable forest sector: possibly one portion carbon trading

one portion bioenergy

one portion biotech and biochemical production

one portion performance fibers for high-value, advanced technical applications

one portion light materials with high technical features

one portion of today’s conventional forest industry

Large population numbers will not drive the market but a huge

number of micro-markets

Thus, there is a need for different price models in the future

Courtesy: Carl Folke

Courtesy: Carl Folke

What To Do?1) Most global transformations are outside core forestry

2) Establish partnerships with outside “forestry” institutions to

get an understanding of the global transformations and their

impact on the forest sector

3) Study the interconnections/linkages of the transformations/

trends and their impacts on the forest sector

4) Study the complete system

5) Develop resilient strategies

6) Work on wood fibers for high quality biotech and

biochemistry products

7) Work on light products with high quality characteristics

8) Design the future forest industrial mills

9) Elaborate on future diverse strategies for the forest sector

10) Constantly address the question: “Are we asking the right

questions?”